Second Mortgages A First For Freddie Mac

January 12, 1986|By Kenneth R. Harney, Washington Post Writers Group

WASHINGTON — Taking out a second mortgage on your home in l986 could be no more costly than taking out a first loan, thanks to a precedent-setting new national financing program scheduled for kickoff Monday.

The Federal Home Loan Mortgage Corp., popularly known as Freddie Mac, plans to offer second mortgages across the country at discount prices close to or even below what it charges for traditional 30-year fixed-rate mortgages.

That means rates of 10 1/2 percent to 11 percent for seconds in today's market -- prices well below what seconds commanded even in the single-digit mid-1970s, when first-mortgage rates were in the 8 percent and 9 percent range. Second mortgages back then went for 12 percent to 14 percent, and often higher.

Freddie Mac's new seconds will run for five to 15 years, will carry no variable rates or payment terms, and will go as high as $66,625. They will be available through participating local savings and loans, savings banks and mortgage banking firms in most major markets during the next 30 to 60 days, according to Freddie Mac spokesmen.

Local lenders will originate the loans at the rates and terms prescribed by Freddie Mac, and then sell them to the Washington-based, congressionally chartered private corporation. Freddie Mac will then package them into bondlike securities, and sell them to national investors via Wall Street.

The mortgage corporation's sudden entry into the second loan arena is highly significant for homeowners.

First, it is likely to fan the flames of the price war under way in the fast-growing, $75 billion a year, second-mortgage field. Freddie Mac is a major force in the national capital markets. By offering fixed rates below those of competitors, it should pressure lenders in most cities to cut prices. Second, it should help turn some homeowners away from open-ended, floating-rate ''credit-line'' arrangements with commercial banks. These home- equity credit lines have been criticized by consumer advocates for encouraging excessive borrowing, with little protection in the event of interest-rate run- ups.

Typically priced at 1 1/2 to 2 1/2 percentage points above the short-term prime bank rate, these revolving loan accounts have not had serious competition in price or terms since their inception three years ago. Officials say Freddie Mac's loan is aimed directly at providing such competition.

Finally, Freddie Mac's new program should foster national standardization in a field fraught with consumer pitfalls. Second mortgages have been the focus of scandals in several states during the past 12 months. Homeowners have been persuaded by lenders to sign up for loans with confusing terms and high effective rates. When the consumers later found themselves unable to handle the heavy payment burdens, they lost their homes in foreclosure sales.

Second mortgages or deeds of trust are loans secured by a portion of the equity of a home. They are called seconds because they are ''junior liens.'' That is, in the event of a foreclosure, they are paid off after the first mortgage is paid.

Suppose, for example, that you own a home worth $125,000. Let's say, too, that you've paid your first mortgage down to $50,000. In other words, you have $75,000 worth of equity in your home.

You can either let that equity sit untouched, or you can use it as collateral to borrow for the kids' college education, or for a business investment you want to make.

Assuming your credit history is sound and the house appraises at $125,000, you ought to be able to borrow anywhere from $30,000 to $50,000 in the form of a second mortgage or home-equity loan.

Under Freddie Mac's new program, the total of your existing first mortgage plus any new second mortgage will not be allowed to exceed 80 percent of the value of your home. In your case, the 80 percent limit means a $50,000 maximum loan ($50,000 first mortgage plus a $50,000 second equals 80 percent of $125,000).

The specific rate you get will depend upon interest rates in the overall economy. If rates continue to fall during the first quarter of l986, according to Michael Coffey, Freddie Mac's acting executive vice president for marketing and sales, fixed-rate second mortgages in ''the low l0 percent range are certainly possible.''

Other key terms and features to know about Freddie Mac's seconds:

-- The loans will be restricted solely to owner-occupied, one-to-four family dwellings. Second homes, vacation properties and investor units won't be permitted as collateral.

-- You'll get two types of loans to choose from: one with a five- to seven- year term, and the other with a 15-year maximum term. Both loans will carry fully amortizing monthly payment schedules for principal and interest. That means that they will not defer any debt for a final ''balloon'' payment at the end. It also means higher monthly payments than you'd have with 30-year term. -- Up-front fees will be relatively low. The typical transaction will require just $200 to $250 in appraisal, title and credit-investigation fees.